Advertising Associates, Inc. vs. Court of Appeals

The Commissioner of Internal Revenue's letter that expressly states it is his final decision and directs the taxpayer to appeal to the Court of Tax Appeals within 30 days is the reviewable final decision under section 7 of Republic Act No. 1125, and a taxpayer leasing neon signs and billboards primarily designed for advertising is a business agent and independent contractor subject to the 3% contractor's tax under sections 191 and 194(v) of the Tax Code.

Advertising Associates, Inc. is a corporation whose articles of incorporation state that its primary purpose is to engage in general advertising business. It alleged that it sold its advertising agency business in 1949 to Philippine Advertising Counsellors and thereafter limited itself to making, constructing, and installing billboards and electric signs and printing posters, signs, and handbills, claiming to be a media company rather than an advertising company. The dispute arises under section 191 of the Tax Code, as amended by Republic Acts Nos. 1612 and 6110, which imposes a 3% contractor's percentage tax on business agents and independent contractors, and section 194(v), which defines a business agent to include persons who conduct advertising agencies; Presidential Decree No. 69 later added paragraph 17 to section 191 by taxing lessors of personal property. In prior litigation, Advertising Associates, Inc. vs. Collector of Internal Revenue, 97 Phil. 636, the taxpayer was held liable as a manufacturer for the 0.90% sales tax on its sales of neon-tube signs under section 185(k) of the Tax Code, paid P11,986.18 as sales tax for the 4th quarter of 1948 to 1951, and its contention that it was only a contractor of neon-tube signs subject to the 3% contractor's tax was rejected.

Advertising Associates, Inc. was a corporation whose articles of incorporation stated that its primary purpose was to engage in general advertising business. It alleged that in 1949 it sold its advertising agency business to Philippine Advertising Counsellors, and that its business was thereafter limited to the making, construction, and installation of billboards and electric signs and the making and printing of posters, signs, handbills, and similar items. It contended that it was a media company, not an advertising company. It paid sales taxes for selling billboards, electric signs, calendars, posters, and other items, realty dealer's tax for leasing billboards and electric signs, and 3% contractor's tax for repairing electric signs. The billboards and electric signs it manufactured were either sold or leased.

The Commissioner of Internal Revenue subjected to the 3% contractor's tax the rental income of Advertising Associates from billboards and electric signs. The total liability at issue was P382,700.16. The Commissioner required payment of P297,927.06 and P84,773.10 as contractor's tax for 1967-1971 and 1972, respectively, including 25% surcharge, with the latter amount also including interest, on its income from billboards and neon signs. The assessment was based on the fact that the taxpayer's articles of incorporation provided that its primary purpose was to engage in general advertising business and that its income tax returns indicated that its business was advertising. The articles authorized it, among other things, to conduct a general advertising business as principal and agent; to prepare and arrange advertising devices and novelties; to erect, construct, purchase, lease, or otherwise acquire fences, billboards, signboards, buildings, and other structures suitable for advertising; to carry on the business of printers, publishers, binders, and decorators in connection with advertising; and to display signs, cards, pictures, designs, and mottoes in various public places and conveyances.

Advertising Associates contested the assessments in its letters of June 25, 1973 for the 1967-71 deficiency taxes and March 7, 1974 for the 1972 deficiency. The Commissioner reiterated the assessments in his letters of July 12 and September 16, 1974. The taxpayer requested cancellation of the assessments in its letters of September 13 and November 21, 1974. For about four years, there was no movement in the case. Then, on March 31, 1978, the Commissioner resorted to the summary remedy of issuing two warrants of distraint, directing the collection enforcement division to levy on the taxpayer's personal properties sufficient to satisfy the deficiency taxes. The warrants were served upon the taxpayer on April 18 and May 25, 1978.

More than a year later, Acting Commissioner Efren I. Plana wrote a letter dated May 23, 1979 in answer to the taxpayer's requests for cancellation of the assessments and withdrawal of the warrants of distraint. He justified the assessments by stating that the rental income of Advertising Associates from billboards and neon signs constituted fees or compensation for its advertising services. He requested the taxpayer to pay the deficiency taxes within ten days from receipt of the demand; otherwise, the Bureau would enforce the warrants of distraint. He closed the letter with the statement that it constituted the Commissioner's final decision on the matter and that, if the taxpayer was not agreeable, it could appeal to the Court of Tax Appeals within 30 days from receipt. Advertising Associates received that letter on June 18, 1979. Nineteen days later, or on July 7, 1979, it filed its petition for review. In its resolution of August 28, 1979, the Tax Court enjoined the enforcement of the warrants of distraint.

The Tax Court did not resolve the case on the merits. It ruled that the warrants of distraint were the Commissioner's appealable decisions. Since Advertising Associates appealed from the decision of May 23, 1979, the petition for review was filed out of time. It was dismissed. The taxpayer appealed to the Supreme Court.

• Nature of Business: Petitioner maintained that it is a media company, like a newspaper or radio broadcasting company, not an advertising agency, despite the purpose stated in its articles of incorporation; its business was limited to making, constructing, and installing billboards and electric signs and printing posters, signs, and handbills.
• Leasing Activity: Petitioner argued that leasing neon signs and billboards does not make it a business agent or independent contractor; it stressed that it is a mere lessor of neon signs and billboards and does not perform advertising services.
• Prior Collector's Rulings: Petitioner relied on Collector's rulings dated September 12, 1960 and June 20, 1967 that it is neither an independent contractor nor a business agent.
• Prescription: Petitioner contended that the collection of the tax had already prescribed.

• Liability as Business Agent/Independent Contractor: Respondent Commissioner justified the deficiency assessments on the ground that petitioner's rental income from billboards and neon signs constituted fees or compensation for its advertising services.
• Corporate Purpose and Tax Returns: The Commissioner relied on petitioner's articles of incorporation, which provided that its primary purpose was to engage in general advertising business, and on its income tax returns, which indicated that its business was advertising.

• Timeliness of Petition for Review: Whether the petition for review filed in the Court of Tax Appeals was timely, specifically whether the reviewable decision was the Commissioner's letter of May 23, 1979 or the warrants of distraint.
• Liability for Contractor's Tax: Whether petitioner is a business agent and independent contractor subject to the 3% contractor's tax under sections 191 and 194(v) of the Tax Code on its rental income from billboards and neon signs.
• Surcharge: Whether the 25% surcharge should be imposed on the deficiency assessments.
• Prescription: Whether the collection of the tax had prescribed.

• Timeliness of Petition for Review: Yes. The petition was filed on time because the reviewable decision was the Commissioner's letter of May 23, 1979, which expressly constituted his final decision under section 7 of Republic Act No. 1125, not the warrants of distraint.
• Liability for Contractor's Tax: Yes. Petitioner is a business agent and independent contractor under sections 191 and 194(v) of the Tax Code, since neon signs and billboards are primarily designed for advertising.
• Surcharge: No. The 25% surcharge, interest, and penalty were eliminated in view of prior rulings and the controversial nature of the deficiency assessments.
• Prescription: No. Collection had not prescribed; the warrants of distraint were served within five years after the assessments and were issued to interrupt the five-year prescriptive period.

• Timeliness of Petition for Review: The letter of May 23, 1979, as its tenor shows, embodied the Commissioner's final decision within the meaning of section 7 of Republic Act No. 1125. The Commissioner said so and even directed the taxpayer to appeal to the Tax Court within 30 days. The same situation obtained in St. Stephen's Association and St. Stephen's Chinese Girl's School vs. Collector of Internal Revenue, 104 Phil. 314, 317-318. The directive conformed to the dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment, a procedure demanded by fair play, regularity, and orderliness in administrative action (Surigao Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523). Since petitioner received the letter on June 18, 1979 and filed its petition on July 7, 1979, nineteen days later, the petition was timely.
• Liability for Contractor's Tax: Petitioner relied on Collector's rulings dated September 12, 1960 and June 20, 1967 that it was neither an independent contractor nor a business agent. It considered itself a media company like a newspaper or radio broadcasting company, not an advertising agency despite its articles of incorporation, and argued that leasing neon signs and billboards did not make it a business agent or independent contractor because it was a mere lessor and did not perform advertising services. The undeniable fact, however, is that neon signs and billboards are primarily designed for advertising. Petitioner is thus a business agent and an independent contractor as contemplated in sections 191 and 194(v).
• Surcharge: Although petitioner was liable for the contractor's tax, the 25% surcharge was eliminated in view of the prior rulings that the taxpayer was not a business agent nor an independent contractor and in view of the controversial nature of the deficiency assessments. The Court cited C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519, and Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1084. The dispositive portion also eliminated interest and penalty.
• Prescription: Section 332 of the 1939 Tax Code, now section 319 of the 1977 Tax Code, Presidential Decree No. 1158, effective June 3, 1977, provides that the tax may be collected by distraint or levy or by a judicial proceeding begun within five years after the assessment of the tax. The taxpayer received the deficiency assessments on June 18, 1973 and March 5, 1974. The warrants of distraint were served on April 18 and May 25, 1978, within five years after the assessment. The warrants were issued to interrupt the five-year prescriptive period. Their enforcement was not implemented because of pending protests and requests for withdrawal, eventually resolved in Commissioner Plana's letter of May 23, 1979. The Commissioner did not institute any judicial proceeding; he relied on the warrants to interrupt the statute of limitations, giving the taxpayer ample opportunity to contest the assessments while safeguarding the Government's interest.

• Final Decision of the Commissioner of Internal Revenue — Under section 7 of Republic Act No. 1125, the Commissioner's letter that expressly states it is his final decision and directs the taxpayer to appeal to the Court of Tax Appeals within 30 days is the reviewable final decision. The Commissioner should indicate in clear and unequivocal language what constitutes his final determination of the disputed assessment. In this case, the May 23, 1979 letter, not the warrants of distraint, was the appealable decision, so the petition filed nineteen days after receipt was timely.
• Business Agent and Independent Contractor under the Tax Code — Section 191 defines an independent contractor as including all persons whose activity consists essentially of the sale of all kinds of services for a fee, while section 194(v) defines a business agent as including persons who conduct advertising agencies. A taxpayer that leases neon signs and billboards primarily designed for advertising is a business agent and independent contractor subject to the 3% contractor's tax, notwithstanding its claim to be a mere lessor or media company.
• Elimination of Surcharge for Controversial Assessments — The 25% surcharge may be eliminated where prior rulings had treated the taxpayer as not a business agent nor an independent contractor and the deficiency assessments are controversial. The Court applied this principle to eliminate the surcharge, interest, and penalty while still requiring payment of the tax proper.
• Prescription of Tax Collection — Under section 332 of the 1939 Tax Code, now section 319 of the 1977 Tax Code (Presidential Decree No. 1158), the tax may be collected by distraint or levy or by a judicial proceeding begun within five years after assessment. The issuance and service of warrants of distraint within that period interrupts the five-year prescriptive period. The Court found the warrants were served within five years after the assessments, so collection had not prescribed.

• "This constitutes our final decision on the matter. If you are not agreeable, you may appeal to the Court of Tax Appeals within 30 days from receipt of this letter." — The Commissioner's May 23, 1979 letter, which the Court held was the reviewable final decision under section 7 of Republic Act No. 1125, not the warrants of distraint.
• "We hold that the petition for review was filed on time. The reviewable decision is that contained in Commissioner Plana's letter of May 23, 1979 and not the warrants of distraint." — The Court's ratio on the procedural issue, reversing the Tax Court's dismissal of the petition as late.
• "But the undeniable fact is that neon signs and billboards are primarily designed for advertising. We hold that the petitioner is a business agent and an independent contractor as contemplated in sections 191 and 194(v)." — The Court's ratio on the merits, rejecting petitioner's claim that it was a mere lessor or media company.
• "The warrants of distraint were served upon it on April 18 and may 25,1978 or within five years after the assessment of the tax. Obviously, the warrants were issued to interrupt the five-year prescriptive period." — The Court's ratio rejecting petitioner's prescription defense.

• Advertising Associates, Inc. vs. Collector of Internal Revenue, 97 Phil. 636 — Prior related case; the taxpayer was held liable as a manufacturer for the 0.90% sales tax on its sales of neon-tube signs under section 185(k) of the Tax Code, and its contention that it was only a contractor subject to the 3% contractor's tax was rejected.
• St. Stephen's Association and St. Stephen's Chinese Girl's School vs. Collector of Internal Revenue, 104 Phil. 314, 317-318 — Cited as the same situation where the Commissioner's letter constituted the final decision for purposes of appeal.
• Surigao Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523 — Cited for the dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment, a procedure demanded by fair play, regularity, and orderliness in administrative action.
• C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519 — Cited in support of eliminating the 25% surcharge.
• Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1084 — Cited with C. M. Hoskins for the elimination of the surcharge.

• Section 191, Tax Code (as amended by Republic Acts Nos. 1612 and 6110) — Imposes the 3% contractor's percentage tax on business agents and independent contractors and defines an independent contractor as including all persons whose activity consists essentially of the sale of all kinds of services for a fee. Applied to hold petitioner liable on its rental income from billboards and neon signs.
• Section 194(v), Tax Code — Defines a business agent as including persons who conduct advertising agencies. Applied to classify petitioner as a business agent.
• Presidential Decree No. 69, effective November 24, 1972 — Added paragraph 17 to section 191 by taxing lessors of personal property. Mentioned in the decision as a parenthetical statutory development.
• Section 7, Republic Act No. 1125 — Governs appeals to the Court of Tax Appeals; the Commissioner's May 23, 1979 letter was held to be the final decision within its meaning.
• Section 332, 1939 Tax Code, now Section 319, 1977 Tax Code, Presidential Decree No. 1158, effective June 3, 1977 — Provides that the tax may be collected by distraint or levy or by a judicial proceeding begun within five years after assessment. Applied to hold that collection had not prescribed because the warrants of distraint were served within five years after the assessments.
• Section 185(k), Tax Code — Cited in the prior Advertising Associates case for the 0.90% sales tax on neon-tube signs.

Makasiar (Chairman), Concepcion, Jr., Abad Santos, Escolin, and Cuevas, JJ., concur.